Russian economy already in crisis

Analysts blame the crisis on shrinking foreign demand and on harsher monetary, credit and budgetary policies.

The latest developments in the Russian economy make
it unmistakably evident that the crisis is already here and large-scale
counter-measures must be taken now, analysts say. They believe that government
investments, budget deficit and a reduction in military spending would help
push up economic growth rates.

The Economic Forecasting Institute of the Russian
Academy of Sciences has published a quarterly macroeconomic preview to offer
its vision of the causes of the slow-down of economic activity in Russia. The
experts believe that “the ongoing developments in the economy can already be
described as a crisis – of mechanisms of growth and economic management.” They
blame the crisis on shrinking foreign demand and on harsher monetary, credit
and budgetary policies.

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“The current developments already require
large-scale anti-crisis measures and an active economic policy,” the document says.
The resource base of Russia’s commercial banks should be increased in order to
maintain the current overheating of the retail loans market and provide credits
for companies. The other growth mechanism that should be employed is a build-up
of government and quasi-government investment (companies that are entirely or
partially owned by the state provide up to 40 percent of capital investments).

As a matter of fact, the institute’s experts
believe that the macroeconomic postulate price stability should enjoy priority
over quick economic growth is very wrong, says the daily Kommersant. The
authors of the analysis warn that today is not the right time for more monetary
experiments.

The Economic Forecasting Institute expects a growth
of oil prices to $122 per barrel in 2015, but at the same time it predicts a
slowdown of economic growth to 2.2 percent and a stable inflation of six
percent in the same year. In other words, the think tank foresees no
forthcoming changes to the structure of the economy or the quality of the
business and investment climate. They point to the likelihood of a reduction in
the accumulation of capital assets, low growth in labour productivity and lack
of an influx of direct investments. This is precisely what they describe as the
crisis of economic management.

Experts at the Development Centre of the Higher
School of Economics see eye to eye with their EFI colleagues. According to
their estimates, the quarterly rates of the GDP growth in Russia have been
steady on the decline since the middle of last year. The bad investment climate
and slowly growing demand has caused investment to shrink since the beginning
of the year, while the rate of capital flight has been soaring. The next outflow
of capital has already exceeded 90 billion dollars and no end of this trend is
in sight.

The macroeconomic forecast contained in the draft
budget for three years to come is unrealistic, experts at the Higher School of
Economics said. Economic growth in the country may grind to a halt by the end
of this year. Even if the world economy keeps rising slowly and oil prices stay
high, Russia will show a GDP growth rate of no more than 1.3 percent in 2015.

The Higher School of Economics sees four ways in
which economic growth can be accelerated. An improvement in the institutional
environment and Russia’s rise in the annual rating of global competitiveness
IMD by one point would surely guarantee an acceleration of GDP growth. Another
proposed measure would be giving up the idea of a balanced budget by 2015 and
preservation of the deficit at a level of 1.5 percent of the GDP till 2020. The
funds released in that way would be invested in infrastructures, experts say.
Investing one percent of the GDP into road construction would yield a double
benefit – firstly, an increase in government investment, and secondly, a
reduction in costs and a better image of the country’s economy. Also, it would
be necessary to reduce the funding of spending on arms purchases by one percent
of the GDP and to funnel the money into infrastructures.

As the macro-economic studies director at the
Higher School of Economics, Sergei Aleksashenko, told the daily Nezavisimaya
Izvestia, the medium-term prospects of the Russian economy do not look very
optimistic at all.

“The Russian economy is in a very grave situation
and at this point it is utterly unclear what can change things for the better,”
he complained. “There is no increase in investment. In the meantime, no economy
can grow without financial injections.”

However, as the proposals’ authors acknowledge, a
greater part of their ideas – those of institutional reform, a reduction in
military spending and others – are unlikely to be welcomed by the authorities.

The strategic analysis department director at the
FBC Company, Igor Nikolayev, agrees with the conclusions of his colleagues at
the Development Centre by and large.

“The spending on the development of transport
infrastructures must be increased. This is absolutely correct. But it takes the
political will to do that. The more so, since investments in that industry have
a multiplicative effect,” he explained. “But there is another problem. The
people have accumulated more than ten trillion roubles in this or that form and
the question is what is the most sensible way of putting the money to use. I
believe that individual housing construction should be promoted. The state must
provide access to infrastructures – roads and gas and electric pipelines. The
developers will then begin to spend money to buy building materials, furniture
and equipment. This may give a powerful impetus to internal demand.”